Difference Between Demat Account and Trading Account

by Libord Group One-stop Financial Services

If you want to invest in stock markets, there are a plethora of factors that you should be aware of. Making money in stock markets is not a gamble or a lottery, but a process of systematic and scientific investments. Foremost, you should be aware of the fundamentals of stock markets. The first step for stock market investors is to open up a trading and Demat account. Your trading and Demat account will form the crux of your trades.

One crucial aspect is to know the difference between Demat Account and Trading Account. As a novice trader or investor, knowing this difference would ensure that you open the most suitable Demat and Trading accounts, and begin your journey of wealth creation plan.

What is Demat Account and Trading Account

Demat Account:

A Demat account is also known as Dematerialized account. In other words, converting or dematerializing your physical shares in the electronic format is known as holding a Demat Account.

Why can’t I just hold my shares in the physical format? Why should I convert it in the electronic format?

Holding physical shares involves risk. Your shares might get torn, damaged or lost. Besides, transferring physical shares would involve cumbersome paperwork.

Your shares in the Demat Account can be maintained and stored easily and transferred effortlessly when the need arises. So, it is best to have a Demat Account.

How it works:

Once you open a Demat Account, you will be provided with your unique Demat Account number. This will help you deal electronically with your shares. A Demat Account is quite similar to your bank account, where you have the option to deposit and withdraw money.

In your Demat Account, your securities can be debited or credited. Just like in many bank accounts where you can have zero balance, you can also have zero securities in your Demat Account.

Importance of Demat Account:

You can use your Demat Account to hold a wide variety of financial instruments like equity shares, mutual funds, government securities and exchange traded funds.

It allows you to conduct multiple activities, including trading and investing at the click of a mouse.

Trading account

A trading account is used to purchase and sell shares in stock markets. Once you have a Demat Account, and want to sell your shares, or purchase new securities, you need a Trading Account.

Your Trading Account will have a unique trading number, which will be used to trade in shares.

History of Trading Account:

Before the age of digitalization, share markets operated on an open outcry system, where traders used verbal communication along with gesticulations to buy/sell shares. But, after stock markets adopted the electronic system, the open outcry system was replaced by digital accounts.

Importance:

Once you want to start trading in share markets, you require having three accounts: A bank account, a Demat Account and a Trading Account. Let us understand this with an example. Ashok wants to purchase shares of a particular company. He will place an order through his Trading Account, following which the transaction will be processed in the given stock exchange. The shares will then be deposited in his Demat Account, while the requisite money will be deducted from his bank account.

So, to put it simply, a Trading Account acts as a link between your bank account and Demat Account, allowing you to trade in stock markets.

Having an online trading account helps you to secure access to multiple stock markets like National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).

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Created on Oct 15th 2022 02:29. Viewed 210 times.

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